AUG. 26, 2009 • Eastern Europe is a market that deserves increasing focus as an important area for not just games, but consumer products in general. However, there is also a strong traditional retail business and established game tradition throughout Eastern Europe. DFC’s Prague based correspondent David Watson is very pleased to further our coverage of the region with the following interview with Nikolay Baryshnikov, head of the Gaming Department at 1C Company.

The casual conception of the game business in Eastern Europe in general, and Russia in particular, is a lawless frontier overcome by piracy, bureaucratic meddling, and hassles with organized crime. Every market has its pluses and minuses, and the truth of the Russian market is that there is a very healthy number of game publishers, retailers and developers competing for consumers there.

One in particular, 1C Company, is all three: publisher, developer and retailer. Best known in the West for its IL-2 Sturmovik air combat simulator franchise, 1C is a huge player in the Russian game business. 1C also partners with numerous international game publishers to help them bring their titles to Russia.

DFC: Can you give a brief overview 1C and your position in the Russian marketplace?

Nikolay: 1C is the leading publisher and distributor in Eastern and Central Europe. Early this year we announced that 1C and Softclub are combining their efforts in many spheres – sales, acquisition, distribution, localization, merchandising and transport logistics. Softclub is the biggest console distributor on the Russian market and 1C is known for its leading positions in selling PC games. We supplement each other in a very good way.

We plan to join our efforts in different business trends – sales, acquisition, distribution, localization, merchandising and transport logistics. Both companies complement each other very well. 1C is the leading PC publisher in Russia and Soft Club is strong in console games sales. Together we plan to withstand the economic crisis more efficiently and moreover develop our business in the future more rapidly.

DFC: What are the overall trends in Russian game market?

Nikolay: The overall trend for the Russian and international market is decline of sales. The local market which was rapidly growing during 2008 has shown signs of recession in the end of last year. And it looks like this tendency will keep on evolving in 2009. The genre Top 5 looks similar to the one we had last year: FPS/action, RPGs, Strategy, Simulations, Arcade.

DFC: What has been the impact of the World Financial Crisis? How has it influenced Game Companies and Publishers in Russia?

Nikolay: The world financial crisis has had a huge impact on the Russian economy and on many fields of life inside the country. First of all the purchase power is decreasing. The sales go down as a result. And this refers almost to all types of products including games. To make things worse that happens not only with entertainment products – the whole Russian economy is waning, inflation is high, consumers are not actively buying anything.

Another big problem for us is ruble weakening – it has already fallen against the dollar by more than 55% since last summer

We hope the situation will start to improve or at least stabilize in the second half of this year but there are some pessimistic forecasts on the other hand. All Russian publishers are currently reporting sales declines. There aren’t any exact figures, since there aren’t any public companies on the market, but according to some opinions the decrease is at least 30% in comparison to 2008.

DFC: What is the state of the console video game business in Russia?

Nikolay: The console game market is still second to PC game market, yet is growing steadily – both in terms of install base as well as overall profit gained. The PS2 has the biggest installed base of all platforms but its software sales have declined rapidly since Fall 2008. Today the PS3 is the strongest console platform in terms of software sales – thanks to, among other factors, lack of piracy and strength of the PlayStation brand.

The Xbox 360 has gained considerable popularity as well, but its software sales suffers considerably because of piracy. Nintendo Wii now is a minor participant in the market with the hardware shortages, a rather unappealing software library and a very controversial pricing policy as the main factors for loosing ground against its competitors.

As for handhelds, the PSP is the leading handheld platform both in terms of hardware and software. The Nintendo DS is almost completely excluded from the market – and from key retail chains.

DFC: What is the state of the online game business in Russia?

Nikolay: According to the latest research (autumn 2008) the number of internet users in Russia reaches 32% of the entire population and numbers 37.9 million people. For the past four years the internet penetration in Russia has increased five times. Sixteen percent of Russians use the internet every day, it makes around 19.2 million. That puts Russia in second place after Germany among European states by the number of internet users.

DFC: What is the size of the online game player population?

Nikolay: It is hard to give exact numbers of players. According to our data, one single online game can sell up to 100,000 units at retail. Judging on the number of the servers it can be assumed that the number of recurring accounts in World of Warcraft reached 80,000, which is supposed to be the most popular online game.

It is almost impossible to estimate the number of players in free-to-play MMORPGs, since only the limited part of its stock actually gets to retail. Besides that, there are a number of illegal shards for every major MMORPG, which can reach sev eral dozen and accommodate hundreds of players.

Around 80% of MMO players live in Moscow, Saint-Petersburg and the five other biggest cities of Russia. Every year the internet gets more and more widespread in Russia and we expect the player population will start growing rapidly in the near future.

DFC: What are the most popular online games in Russia?

Nikolay: Even before the financial crisis hit the most popular MMORPGs in Russia were the ones based on free-to-play mechanics, which allowed customers to play without paying monthly fees. There are two main reasons for that. Firstly, not so many Russians are willing to pay for a game that costs them around $15 per month. Secondly, even less of them had an opportunity to pay – international credit cards were not so wide-spread in Russia. The teenagers who form the bulk of the MMORPG audience had to ask their parents not only for the money, but also to lend them the credit card.

Now the situation has changed. Russian credit cards are now trusted by the billing system of any MMORPG, there are a number of alternative payment methods available and game cards are sold in retail all over Russia. But still, the Russian gamers are faithful to free-to-play mechanics, especially the Korean-style games. A great number of those have launched in Russia and are enjoying moderate interest, which is limited only due to their huge number. The Russian servers for Lineage II were launched recently in Russia with free to play mechanics. This shows how popular that type of MMORPGS is in Russia if NCSoft has agreed to go that way.

This year 1C Company is planning to launch a free-to-play MMORPG Tayniy Gorod Online (Arcane City Online), which is based on a very popular franchise in Russia. Arcane City is a series of books that numbers 16 volumes already. It features an elaborate fantasy universe and is set in alternative version of Moscow City. The huge number of applications for the beta testing definitely shows that the game will be very popular and will be able to get a great number of recurring accounts.

Among the MMORPGs requiring monthly fees you cannot help but mention World of Warcraft, which was the first one to launch with Russian servers and feature full localization into Russian. Recently Warhammer Online was also launched, but it couldn’t compete with the mighty Blizzard creation. The timing of Warhammer Online was really bad: the financial crisis is in full swing, and Wrath of Lich King, a fresh new add-on to World of Warcraft has just launched. Therefore, the number of subscribers to EA Games first MMO didn’t go over 15,000 in Russia.

Age of Conan: Hyborian Adventures was the third major MMORPG to launch in Russia in full localization and is operated and distributed by 1C Company. Unique features, a mature setting and top-notch graphics made it a real hit in Russia. The localization of the game was praised to be the best among MMO on the market. The monthly fees were cut in half for Russia – to play on European servers you would have to pay no less than €13, but the Russian version subscription would cost you only €7. And of course, it also contributed to making the game popular, along with Funcom’s constant efforts to add new content, new features and correct the bugs.

DFC: Can you provide us information on 1C’s retail chain in Russia. How many stores do you have now, what cities are they located in, and what is the average square footage?

Nikolay: The average square footage of 1C stores is around 100 meters (they are usually from 40 to 230 square meters). There are 43 shops in 18 cities of Russia and three shops in Kazakhstan. We cover all the major Russian cities, such as Moscow, Saint-Petersburg, Ekaterinburg, Kazan, Voronezh and many others.

DFC: What games and accessories would we find in an 1C store? Mainly PC Games? Do you sell game cards? If so, which ones?

Nikolay: First of all these are full game stores, of course. They are not only PC games stores, although those occupy quite a lot of floor space since Russia is primarily a PC market. Our stores also sell Xbox 360 and PS3 titles, as well as games for handheld consoles. They also have console hardware and accessories and different home and business software. Some shops also have a selection of DVDs with movies and books (on software).

DFC: Can you tell us how 1C stores advertise, merchandize, and promote games to Russian consumers?

Nikolay: The first and main difference is the price. Retail prices for games in Russia are lower than in Western Europe. As a general rule, it is not the stores but the publishers that are doing promotion in-store – special offers, showcases, etc. In those cases where retail chains are promoting games, including ATL and web promotion, they are doing this with financial support from the publishers.

DFC: Who are direct retail competitors of 1C?

Nikolay: If we take into consideration the specialized retail sector these are Soyuz, Nastroyenie and Hit-Zona, three biggest specialized chains.

DFC: Back in 2008 1C was quoted as cautioning foreign game retailers from attempting to enter the Russian market due to strong competition and complicated tax systems. How well has Media Markt performed in Russia now that it has more than 14 stores in the country, and how good is Media Markt at selling games to Russian consumers?

Nikolay: Those reports were not fully correct. What we were trying to get across was that it is hard to work in the Russian market without knowing the details and peculiarities, but not impossible. We are looking forward to foreign companies coming over to the Russia. Media Markt is one of our key partners and has achieved success. Despite the fact that this chain doesn’t have a lot of stores (in comparison to some other big local retailers) they have managed to occupy a good share of the local market (which is about several percent of the overall Russian gaming market).

You should also not forget the fact that Russia is a huge country and big chains are not the only retailers. A lot of game sales are done through medium-sized and small retailers.

DFC: Where are the international opportunities for Russian publishers? CIS? Western Europe? North America? Have you looked into the markets of Latin & South America?

Nikolay: We are constantly working to make our games available to the players all over the world. Modern technologies, quality products, spreading of Internet and the new distribution methods like digital download make it all possible. Our goal is to create “internationalized” high-quality products interesting for people all over the globe.

DFC: Are there any other government incentives for entering the industry?

Nikolay: No the government doesn’t participate in operation of the game development industry in Russia.

DFC: How was the Russian Game Developers Conference, which was held in 2008. Please fill us in on the reactions from developers?

Nikolay: The last Game Developers Conference held almost a year ago was big and interesting. Almost all leading publishers and developers took part in it. I’m afraid this year it might be different due to the overall economic problems and problems inside the industry as well. KRI 2008 featured a lot of useful and quite interesting lectures and seminars dedicated to different spheres of the Russian game industry – marketing, business and development.

Such events help not only in terms of theory, but also to consolidate the industry. Russia has a huge territory and developers from far away districts do not often have a chance and a reason to go to Moscow. And these guys have good projects as well.

Such events are useful for both publishers and developers. Publishers can seek new teams and projects without sending their producers to far away regions and developers can show their projects to all publishers all at once. And hopefully get signed after the show is over.